Greetings all. I want to share a conversation that held on another blog “Surviving Yucatan”, before we head full swing into another tax filing season.

“Good Morning Mr. Dillinger, Well said. All of it.

The bit about revenue generation came from a Notaria who interpreted renting the property, acting as a landlord, using the property as a hostelry, or collecting rent or lease payments, etc “additional activities” that disqualify the property from being exempt.

This interpretation made sense to my crude understandings. Thank you for all the good inputs, steve”

Please excuse my tardy response to your response. Unfortunately, I recently received notice of the post.

First I want to state the following: Steve, If I previously struck a nerve, I apologize.

I think that you are doing a great job keeping the public informed on the situation.

My only issue is that I would have been even more impressed if you mentioned, as the AICPA did, that the Revenue Ruling only applies if “the Bank is not permitted to perform any activity beyond holding title”. However, the majority of professionals have also overlooked this sentence when discussing Revenue Ruling 2013-14.

My comments follow yours and are in (parenthesis)

As a US CPA in San Francisco, I suspect that you have limited experience working with Mexican Notarios or Mexican Attorneys on complex real estate law issues. Mexican law, especially in the area of real estate and tax status is very dense, and not easily understood by outsiders. If you ask 5 Mexican attorneys about even modestly complex real estate/tax-law issues, you generally get 5 different answers from licensed professionals.

(Actually, I have quite a bit of experience with Mexican Notarios and Mexican Attorneys. Most recently, I was in Merida and a Mexican Attorney was discussing Revenue Ruling 2013-14.I asked him if he had read the ruling. He said that he had heard about it from a US client. I informed him that the ruling doesn’t apply if the bank is permitted to perform activities beyond holding title to the property.

The Attorney was shocked and said “then the ruling applies to nobody”.

However, I agree with you regarding asking 5 attorneys a question and getting five different answers. It’s the same in the US. Give 100 CPAs tax information and you’ll receive 100 different tax returns!)

From reading Mr. Zuniga’s personal web page, Zuninga has impressive US business law credentials, but one quick look at his resume and his titles reveal that he is missing both the “Lic.” and “CPA” qualifications (or US Tax Law certifications) after his name. The absence of the “Lic.” says that he has not qualified to practice law in Mexico. The absence of CPA and apparent absence of formal training in US Tax Law on foreign trusts also speaks volumes.

(Hmm, I don’t think that I follow your logic here. We are not questioning Mexican Tax Law.

What we are questioning is U.S. Tax Law. The only issue is whether or not a “Bank is permitted to perform any activity beyond holding title” to determine if a Fideicomiso is covered under Revenue Ruling 2013-14.

Typically an International Transactions Attorney with over 20-years of experience with both a Bachelors and J.D. from Harvard isn’t considered to be lacking in qualifications)

When someone without qualifications offers advice that is completely contrary to the expert opinions of Mexican Notarios and Mexican lawyers, and contrary to US tax experts, then each reader has a choice: Should they:

(Agreed, each reader has a choice! Unfortunately, it appears that most tax professionals who have posted on the internet, did not actually read the entire Revenue Ruling and simply stated that a Fideicomiso is no longer required to file Form 3520 or 3520-A.

As with all IRS code, regulations and rulings, one must read all the way to the bottom of the authority to see if the document actually applies to their situation.

In this case, the comment that “if the Bank is permitted or required to engage in any activity beyond holding legal title the revenue ruling does not apply”, causes great concern.

This statement could be a huge “gotcha”! How can anyone possibly tell if their Fideicomiso is covered under the Revenue Ruling if they do not have a translated copy? That is, unless they can read Spanish.

This is why the AICPA Trust Committee stated that they would continue to review trust agreements to evaluate whether they fall under the Revenue Ruling when they publicly thanked the IRS for the Ruling.

Additionally, each “vanilla” translated Fideicomiso Trust document that I reviewed contains clauses that cause concern. When I forwarded these comments to the AICPA Trust Committee, I was told that the clauses contain characteristics that potentially may viewed by the IRS as not within the scope of the Revenue Ruling, and that the beneficiary should request a Private Letter Ruling.

Therefore, in a situation that can result in such great penalties, I advise that nobody follow anybody.

Instead, one must wonder what would happen if they were audited by the IRS.

What would happen If the IRS noticed their Fideicomiso and read Revenue Ruling 2013-14 and asked for proof that the Bank was not permitted or required to engage in any activity beyond holding legal tile?

How do you think the IRS Agent would respond to I don’t know it’s all in Spanish?

I think the IRS Agent would require a translation and that one had better hope that nothing in the Fideicomiso Trust Document even hints that the Bank is permitted to perform any activity beyond holding title.)

~ Follow the advice of someone with no formal qualifications in Mexican law, and zero published background on US tax law, an individual who has not passed even the lowest levels of official Mexican certification, who also offers ZERO legal references, and ZERO specific examples, and ZERO legal precedents or official decisions, and ZERO official IRS policies & decisions, to confirm his personal interpretation of Mexican law? Or

(Again, I’m a little confused here. A International Transactions Attorney with both a BA & JD from Harvard Law School, who creates Mexican Fideicomiso’s, has zero experience? Again, we are not discussing Mexican Tax Law. We simply need to know if the Bank is permitted to perform any activity beyond holding title)

(You are correct, the AICPA Trust Committee stated that they would continue to review trust agreements to evaluate whether they fall under the Revenue Ruling)

Each person can decide who they want to represent them on Mexican real estate matters and complex US/international tax matters on trusts: An American with a Harvard law degree, and no published Mexican law license and no published right to practice law in Mexico and no published expertise in US tax law, or to hire a licensed experienced US or Mexican professional. Most people would consider hiring a US Tax expert, who knows US tax laws on foreign trusts.It is also worth noting that Mr Zuniga lists his best attributes and highest most important skill levels and experience as: “Commercial Transactions” and “Mergers and Acquisitions“. Do most readers believe that Harvard-trained US Merger and Acquisition specialists are the best choice, especially when the M&A guy is preaching things that are the exact opposite of what is reported in the Press, and the opposite of Mexican legal professional’s opinions, and is ironically the opposite of months of multiple IRS publications?

(Have you read any translated Fideicomiso documents?

I have, and all of them contain clauses that permit the Bank to perform activities beyond holding title. When I presented these clauses to the AICPA Trust Committee, I was told that these were not “vanilla trusts”.

Well, they were “vanilla trusts”. This is why I agree with Mr. Zuniga, it’s my experience that Fideicomiso trust documents contain comments that permit the Bank to perform activities beyond holding title.

While I cannot say all Fideicomiso Trust Documents contain such clauses, I can state that my experience reading the documents concur with Mr. Zuniga’s statement that there are protective mechanisms built in to each trust which could be deemed to be beyond merely holding title.

As a result, I believe it is dangerous for anyone to act as if Revenue Ruling 2013-14 pertains to them unless they have a trust document that they are able to both read and understand.

Additionally, if any comments suggest the Bank is permitted to perform an activities beyond holding title they should request a Private Letter Ruling or obtain a ruling from a tax professional with good Professional Liability Insurance.)

Now, to return to practical real-world examples of Fideicomisos that are KNOWN to not qualify, consider Americans who have Fideicomisos that allow them to rent their properties, and to generate revenues: This class of revenue generating Fideicomisos have been described as being required to file annually with the IRS. Do good experts miss or forget to mention actual areas where the IRS has said that Mexican Fideicomiso holders must file?

(I’m not sure where you received this information regarding revenue generation?

If you read the Revenue Ruling, Situation 1 discusses a property that is occasionally leased and that the owner reports the income on their US federal income tax return.

The holding is that under Situation 1, they do not have to file as a foreign trust unless the bank is permitted or required to engage in any activity beyond holding title. The receipt of occasional rental income is not an issue. However, the Revenue Ruling does not address the factor of regular rental income.

The Revenue ruling does not state that revenue generating Fideicomiso’s must file From 3520/3520-A. However, the beneficiary does need to report the income on either Schedule C or E.)

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I want to take a moment away from 10/15 tax return deadlines to share an unsolicited email that I received.

By the way, even though the government is shut down, there’s no extension for the 10/15 extended tax deadlines.

Juan Zuniga of Rimon Law, was kind enough to share the following and gave his permission to post the following on this blog.

“I’ve read your interesting commentary on fideicomisos. As part of my practice, I am involved in negotiating and documenting fideicomisos for US clients on a daily basis.

There is no fideicomiso contract that is limited to the bank merely “holding title”.

Bear in mind that a fideicomiso is a creature of contract under Mexican law and thus, it does not exist as a separate legal person like a corporate entity or even a US Trust.

The Mexican banks that act as trust fiduciaries (fiduciarios) build protective mechanisms into each trust which allows them to take certain actions under various circumstances including, but not limited to execute mortgages to create a lien against the property, take an instruction to sell the property, to enter into long-term leases, etc.

All these things must be done at the instruction of the trust beneficiary but since the technical title to the land is in the name of the Bank, virtually any action could be deemed to be beyond merely holding title.”

Remember, there continues to be confusion about IRS Revenue Ruling 2013-14 as it states that the owner of a Fideicomiso (Mexican Residence Trust) does not have to file Form 3520 & 3520-A unless the Bank is permitted to perform activities beyond holding title to the property.

From Mr. Zuniga’s opinion, IRS Revenue Ruling 2013-14 applies to nobody, as all of the Banks that are Fideicomiso trustees are permitted to perform tasks beyond holding title.

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While I’d like to say that it’s over and nobody with a Fideicomiso has to file a Form 3520 or Form 3520-A ever again. That would be a lie.

Unfortunately, there continues to be confusion about IRS Revenue Ruling 2013-14 as it states that the owner of a Fideicomiso (Mexican Residence Trust) does not have to file Form 3520 & 3520-A unless the Bank is permitted to perform activities beyond holding title to the property.

It’s a shame that most news headlines, articles and blogs only wrote summaries that state that you no longer have to file Forms 3520 & 3520-A. Most articles don’t mention that the Revenue Ruling does not apply to everyone!

Most people that I know never translated their Fideicomiso Trust Document. However, I did notice a few issues in the translated documents I reviewed. Examples are listed below:

“The fiduciary has the ability to administer, control, improve and repair, the property entrusted.”

“When the duration period of the trust runs out the beneficiaries must request that the fiduciary extend the contract or the fiduciary will proceed to sell the property. The proceeds of the sale will be invested and maintained by the fiduciary for the trust beneficiaries. The fiduciary shall manage such account as long as the beneficiaries don’t claim it.”

“In the case of an emergency, the fiduciary may discreetly carry out essential actions required to defend the validity of the trust.”

The American Institute of CPAs (AICPA) Trust Committee sent a letter to the IRS thanking them for the Fideicomiso Revenue ruling and stated that they would review activities permitted by the trustee in Fideicomiso Documents before applying the Revenue ruling.

Therefore, I sent the above activities to the AICPA Trust Committee to obtain their opinion. Interestingly, the committee thought that these comments did not come from a “vanilla” Fideicomiso Document.

The committee determined that the above activities have trust characteristics that potentially may be viewed by the IRS as not within the scope of the revenue ruling.

The translated Fideicomiso Documents that I read with the activities that I forwarded to the AICPA where in fact “vanilla” Fideicomiso Documents, one was from HSBC Mexico, S.A. and the other was from Banca Promex, S.N.C.

It is extremely frustrating to receive a Revenue Ruling from the IRS that initially states that a Fideicomiso is not required to file Forms 3520 & 3520-A and then states that this only applies if the bank is not permitted to perform activities beyond holding title.

As stated in a previous post, I believe the reason that this Revenue Ruling was decided was because the IRS was bombarded with 3520’s and 3520-A’s that didn’t bring in additional tax revenue.

I only wish that the IRS would have simply said that a Fideicomiso (Mexican Residence Trust) does not have to file form 3520 & 3520-A. However, the IRS did not say that.

It would be interesting to see what would happen if everyone continued to bombard the IRS with 3520’s & 3520-A’s with an attachment stating why you’re continuing to file.

The attachments could state that you are filing because Revenue Ruling 2013-14 is too ambiguous, the penalties for not filing are too huge and the cost of translating your Fideicomiso Document and obtaining a Private Letter Ruling are too prohibitive. Therefore, while you believe that the IRS does not want you to file these forms the risk for not filing is too great, and that you’ll continue to file the forms until the IRS provides clearer instructions.

For those of you who are sure that your Bank Trustee cannot perform activities beyond holding title. You’ll need to decide if you’ll file your extended forms for 2012 and state that this is your final return and attach a note referencing Revenue Rule 2013-14 by 9/16/2013 or wait to respond to an IRS Notice asking why you didn’t file.

If you already filed, you may want to file amended and final forms for 2012 to prevent any letters regarding not filing for 2013.

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This victory goes to those who wrote and assisted with the ruling and especially to those who bombarded the IRS with 3520’s and 3520-A’s. Those who filed the Forms, that the IRS previously indicated were required, had an effect akin to that of protesters in regards to obtaining the ruling from the IRS.

Recall that only a few years ago, one used to be able to call the IRS and obtain an unlimited amount of tax ID’s for a foreign entity. Then the IRS got fed up and limited it to 5 ID’s per person per day. Afterwards, the IRS updated the IRM (Internal Revenue Manual) to state that a Fideicomiso is a Foreign Trust that is not required to file Form 1041. That action was followed by adding a special category when requesting a tax ID for a Fideicomiso. The IRS continued to be bombarded with tax ID requests and now the IRS only allows one foreign tax ID per phone number per day.

My sources say that the continued limitations on obtaining foreign tax ID’s was a result of the IRS being bombarded by those with a Fideicomiso requesting a tax ID.

In a previous post, I mentioned that the ruling was decided on unrelated tax law. The IRS ruling was baffling! Therefore, my sources and I believe the motivation behind the ruling was because of the sheer numbers of 3520 and 3520-A Forms being filed with the IRS. Accordingly, everyone with a Fideicomiso owes those who filed a pat-on-the back!

Ok, a 100% guarantee from the IRS is rare. However, I believe that the possibility of a person being audited and then having the agent decide that the ruling was based on unrelated regulations not improbable. Moreover, if you rely on a ruling as your reason for not filing, you would have a reasonable cause for not filing and would be safe from penalties.

However, I have a concern. The ruling does not apply: “if the trustee is permitted to perform any activity besides hold title.”

So, what in the world does “permitted to perform any activity besides hold title mean?”

Well, because I was privileged to receive a redacted copy of the Private Letter Ruling request that determined that a particular Fideicomiso was not required to file Form 3520 or 3520-A, which has much more detail that the published version of the Private Letter Ruling.

And, because the Private Letter Ruling request included a copy of the Fideicomiso Deed in both Spanish and English. The Ruling request pointed out that the Owners had the power to instruct the trustee to transfer ownership, direct the trustee to mortgage the property, and amend the Fideicomiso document. If the owners died before designating a substitute beneficiary, the trustee could transfer the rights to the Owner’s heirs.

The above paragraph implies that if the Trustee is only permitted to perform activities related to holding title then this would be the same as only being permitted to hold title and there would be no Form 3520 or 3520-A filing requirement.

Unfortunately, many people with a Fideicomiso did not have their Fideicomiso Documents translated and have no idea what the English Translation may say about what the Trustee is permitted to do or not do in regards to their Fideicomiso.

All Fideicomiso Documents are notthe same. Some documents may include wording that indicate that the Trustee is permitted to perform in an activity beyond holding title, such as the following:

“The fiduciary has the ability to administer, control, improve and repair, the property entrusted.”

“When the duration period of the trust runs out the beneficiaries must request that the fiduciary extend the contract or the fiduciary will proceed to sell the property. The proceeds of the sale will be invested and maintained by the fiduciary for the trust beneficiaries. The fiduciary shall manage such account as long as the beneficiaries don’t claim it.”

“In the case of an emergency, the fiduciary may discreetly carry out essential actions required to defend the validity of the trust.”

Do you think that the above activities are beyond the mere holding of title?

Knowing that the Revenue Ruling states that “if the Trustee is permitted to perform any activity beyond holding title” and not confirming this information by translating and readingyour Fideicomiso Document could be considered willful blindness (a conscious effort to avoid learning about reporting requirements) by the IRS. That is, if it’s somehow determined during an audit that the Trustee is permitted to perform activities besides holding title.

In other words, it’s a good idea to have a translated copy of your Fideicomiso Document, especially if you cannot read legal Spanish. By having your Fideicomiso document translated will enable you to determine if the Trustee is permitted to perform an activity beyond holding title. Moreover, it is not a bad idea to have a translated copy even if it wasn’t for the IRS.

The American Institute of CPA’s (AICPA) issued a Letter to the IRS thanking them for the Revenue Ruling, as they have been requesting one since 2007: The letter contains the following paragraph:

“We realize that the ruling does not apply if the MLT owns any other property or is permitted or required to engage in any activity beyond holding legal title to the Mexican real property. Therefore, we will continue to review trust agreements to evaluate these points.”

Those who helped obtain the Revenue Ruling by bombarding the IRS 3520’s and 3520-A’s are probably wondering what to do next. Should you continue to file, should you file a final return or should you stop filing?

If you already filed Form 3520 & 3520-A for 2012 and you believe that the Trustee is not permitted to perform any activity beyond holding title you may want to Amend the Form 3520 by checking the Box in Part A for Final Return and Amended Return and include a statement regarding IRS Revenue Ruling 2013-14 and state that the Trustee is not permitted to perform any activity beyond holding title.

For Form 3520-A, do the same and check the boxes at the top of the Form where it states “check appropriate boxes”

If you extended Form 3520 & Form 3520-A for 2012, you can either file the Final Forms with the above explanation or wait for a letter from the IRS requesting the returns and providing your explanation.

If you don’t know whether or not the Trustee is permitted to perform any activity beyond holding titleyou either need to find out by reviewing a translated copy of the Fideicomiso Document or continue filing Form 3520 & 3520-A.

Remember, by not filing Form 3520 or 3520-A you are affirmatively stating that your Trustee is not permitted to perform any activity beyond holding title for the Revenue Ruling to apply to you.

Also, note that in the future Mexico may reform Article 27 of the Mexican Constitution to allow foreigners to directly own property in the restricted zone.

Let us know if you need any help with your IRS Foreign Reporting Requirements

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Revenue Ruling 2013-14 states that a Fideicomiso is not a Foreign Trust. Great News, or is it?

After few discussions with those involved with obtaining the Revenue Ruling, my previous post has been edited.

At first my main concern with the Revenue Ruling was the comment that the Revenue Ruling left an opening for the IRS regarding activities beyond holding title. After the discussions mentioned above, this post will begin with additional concerns regarding the Revenue Ruling followed by activities beyond holding title.

An IRS Revenue Ruling is not valid unless it agrees with current IRS Code. Unfortunately, I learned that Revenue Ruling 2013-14 does not agree with current IRS Code for the following reason.

The culprit is § 301.7701-1(b). This regulation discusses the classification of organizations for federal tax purposes and states that §§ 301.7701-2, 301.7701-3 & 301.7701-4 determine whether organizations are recognized as separate entities. § 301.7701-4 was used in the Revenue Ruling to determine that a Fideicomiso was not a trust. It cannot do that! The definition is used to determine if the trust is a separate entity, not to determine whether a trust is a trust! This is comparing apples and oranges.

In other words, § 301.7701-4(a) does not determine whether a trust is a trust, that is determined by local law. What § 301.7701-4(a) does is determine whether a trust is considered to be a separate entity. This is extremely important when determining if a 1031 Exchange is permitted as with Rev Rul 92-105.

You can use Rev Rul 92-105 and § 301.7704-4(a) to determine that a property held in a Fideicomiso is eligible for a 1031 Exchange with other eligible Foreign Properties. Additionally, you can determine that a Fideicomiso is not considered to be a separate entity (just like a Single Member LLC and a Living Trust). However, just because a Living Trust is not considered to be a separate entity does not mean that it is not a Trust.

The following definition of a Trust was obtained from Black’s Law Dictionary. “An equitable or beneficial right or title to land or other property, held for the beneficiary by another person, in whom resides the legal title or ownership, recognized and enforced by courts of chancery.”

A Land Trust is a Trust. This is evident. However, the IRS does not classify a Land Trust as a separate entity.

A US Living Trust, a US Land Trust, and a US Single Member LLC are not required to file returns with the IRS as separate entities. However, if a similar entity is organized in a Foreign Country, it is required to file Foreign Reporting Forms with the IRS.

IRS Code Trumps a Revenue Ruling. Code Section 7701 states that any trust that is not a US Trust is a Foreign Trust. It does not state only trusts that are categorized as a separate entity, it states any trust.

§ 7701(31) Foreign estate or trust

(B) Foreign trust

The term “foreign trust” means any trust other than a trust described in subparagraph (E) of paragraph (30).

§ 7701(30)(E)any trust if—

(i)a court within the United States is able to exercise primary supervision over the administration of the trust, and

(ii)one or more United States persons have the authority to control all substantial decisions of the trust.

Unfortunately, I now have serious doubts as to the validity of the Revenue Ruling as it does not agree with current Tax Code. I also wonder how many clever, knowledgeable Revenue Agents familiar with the tax code would come up with a similar conclusion regarding the validity of the ruling.

What we need is a ruling that provides an exception from IRS Foreign Reporting Requirements for a Foreign Land Trust, not a ruling that is not in agreement with Internal Revenue Code. This is why I have been advising people to contact their Congressperson and request an exception for a Fideicomiso or at least a simpler Form as the IRS did with a Canadian RRSP and Form 8891.

Issue #2

If you read the ruling all the way to the end you’ll discover that as with a scorpion, it’s what’s at the end of this ruling that can sting you.

This Revenue Ruling may look like a gift. However, there is a good chance that it is a Trojan Horse!

Under the Holding(s) section of the Revenue Ruling, it states that if the Mexican Bank is permitted or required to engage in any activity beyond holding legal title to the property, the Revenue Ruling does not apply to you.

In other words, if you use the Revenue Ruling 2013-14 to determine that you do not have a foreign trust without making sure that the ruling applies to you, and don’t file Forms 3520 & 3520-A, you could be stung by the IRS.

To apply the ruling to your Fideicomiso you must determine whether or not the Fideicomiso Trust Document provides for any activities that are either permitted or required by the Mexican Bank.

Most likely, when you read your Fideicomiso Document you will find at least one activity that is either permitted or required to be performed by the Mexican Bank.

Here’s what BBVA Bancomer states on their website regarding a Fideicomiso.

“The Fiduciario: A Mexican bank, in this case BBVA Bancomer, which holds the title of the property for up to 50 years, and acts on behalf of the non-Mexican beneficiary in all transactions related to the property held in trust.

Does BBVA Bancomer sound like they are permitted to provide activities beyond holding title to the property?

Here are a few examples of activities that are mentioned in Fideicomiso Documents that I have read:

“The beneficiaries shall periodically notify the fiduciary as to the amount of construction or improvements carried out and their progress, so that the fiduciary in turn may modify the assets of the trust and carry out the accounting computations required.

Is carrying out accounting computations an activity beyond holding title?

“The Fiduciary, as the proprietor of the patrimony in Trust, upon administering it, will have all the rights and actions required to fulfill it … having all kinds of powers as owner, including, in a declaratory and non-restrictive way, all powers for litigation and collections related to administration and dominion that may require a specific clause as well as powers to acquire and mortgage in any ways, or to collect any payments and issue receipts, to endorse titles of credit, to grant legal powers and to waive protection lawsuits.”

Is the granting of legal powers an activity beyond holding title?

“The fiduciary shall present a report on the trust with fiduciary substitution to the Department of Foreign Affairs annually and provide a description of any substitute beneficiaries.”

Is providing an annual report an activity beyond holding title?

“When the duration period of the trust runs out the beneficiaries must request that the fiduciary extend the contract or the fiduciary will proceed to sell the property. The proceeds of the sale will be invested and maintained by the fiduciary for the trust beneficiaries. The fiduciary shall manage such account as long as the beneficiaries don’t claim it.”

Is the management of the account permitted and therefore an activity beyond holding title?

“The beneficiaries are considered legally as the depositaries of the property and must inform the fiduciary of any problem or irregular situation related to the property so it can carry out any necessary actions or procedures.”

Is the carrying out of actions or procedures an activity beyond holding title?

“In the case of an emergency, the fiduciary may discreetly carry out essential actions required to defend the validity of the trust.”

Is defending the validity of the trust an activity beyond holding title?

Do your answers to the above questions lead you to believe that the Mexican Bank might be permitted or required to engage in any activity beyond holding legal title to the property?

What does your Fideicomiso Document state regarding the activities of your Mexican Bank Fiduciary?

Remember, if the Fideicomiso Document is permitted or required to engage in any activity beyond holding title to the property, the Revenue Ruling does not apply to you, and you have a Foreign Trust reporting requirement.

If you rely on Revenue Ruling 2013-14 and do not file the required Foreign Reporting Forms, the Revenue Ruling could diminish any hope of relief from a reasonable cause from penalties for not filing.

For example, let’s say you’re audited by the IRS and they ask about your Foreign Property. They find out it’s held in a Fideicomiso and they refer to the Letter Ruling. The first question a reasonable Agent would ask if is the Fiduciary was permitted or required to engage in any activity beyond holding title to the property. Answering “no” probably won’t cut it. Instead, the Agent would want to look at the trust document. If the document states that the Fiduciary is permitted or required to engage in activities beyond holding title you are stung! An Agent might also be familiar with the code and regulations mentioned earlier and realize the the ruling is not valid.

Before relying on this ruling, make sure what powers the Mexican Bank that holds your Fideicomiso can and could perform.

If you determine that the Mexican Bank has the ability to engage in activities beyond holding legal title or that the ruling is invalid, I suggest that you continue filing returns. If you have not yet filed, there continues to be an Offshore Voluntary Disclosure Program that allows you to file without fear of penalty as long as there was no unreported foreign income.

If the Mexican Government changes the law so that a Fideicomiso is no longer required to own property in the restricted zone, everything will change if you no longer desire the benefits that a Fideicomiso provides.

Until then, you have several things to consider.

First, is the Revenue Ruling valid? I discussed why it does not agree with the current IRS Code and that a Ruling is not valid if it does not agree with the Code. However, the decision is up to you and your advisors. If you are not certain that the ruling is valid it may be prudent to file the required returns.

If you are comfortable accepting the Revenue ruling as valid authority, the next step is to determine whether or not the Mexican Bank is permitted to perform any activity beyond holding title. If it does, the Revenue Ruling does not apply to you. From my experience, many US Persons with a Fideicomiso do not read Spanish and did not have their trust documents translated into English. Therefore, determining what the Mexican is permitted to perform may be a challenge.

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Unfortunately, the answer to that question is NO. The only person with a Fideicomiso that is not required to file Form 3520 & 3520-A is the person who requested the Private Letter Ruling (PLR). Think of a PLR as a “get out of jail free card” in the game of Monopoly.

The only person who can use the card to “get out of the jail free” is the person with the card. The same thing applies to a PLR. It only relates to the person who requested it. Additionally, the PLR only helps the person who requested it if it included all relevant information necessary for the IRS Counsel to make a correct determination.

The PLR states that the ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the IRS Tax Code provides that it may not be used or cited as precedent.

Tax professionals look to PLRs to see how the IRS is leaning toward an issue. This is helpful if the IRS has not provided previous clues regarding how the IRS might rule on an issue.

However, on June 24, 2011 the IRS released a General Information Letter stating that “Any U.S. person who transfers property to or has an interest in a Mexican Fideicomiso that is classified as a foreign trust must comply with section 6048 (File Forms 3520/3520-A).” and “If you would like a definitive determination as to whether a particular Fideicomiso is classified as a foreign trust for U.S. federal income tax purposes, you must request a private letter ruling.”

For a PLR to be valid it must contain full and accurate information. Unfortunately, after reading the PLR, I wonder if all important information about the Fideicomiso was disclosed. If not, the PLR may not be a valid “get out of jail free” card for the taxpayer who requested the PLR.

“A PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described.”

Since the PLR says that the person doesn’t have to file Form 3520/3520-A, doesn’t that mean the IRS would say the same thing if they found out about my Fideicomiso?

Forrest Gump said, “Life is like a box of chocolates. You never know what you are going to get”. The statement holds true for the IRS.

As mentioned, the recent PLR that decided that the particular Fideicomiso was not a foreign trust could have been based on incomplete information.

The IRS Counsel reasoned that the Fideicomiso was not required to file Form 3520 or Form 3520-A because the sole purpose of the Fideicomiso was to satisfy the Mexican Federal Constitution Article 27 by vesting legal title to the property in the name of the trustee. As sole means one and only, there is not much grey area to wiggle around in regarding the definition.

While the sole reason of using the Fideicomiso to purchase property may have been to hold title that does not mean that the Fideicomiso only has one purpose!

Most likely, there are multiple purposes for your Fideicomiso. Have you read your trust document? They are not all the same.

Here are a few excerpts from translated Fideicomiso Agreements that we’ve read or that our bilingual Enrolled Agent & CPA candidate translated: Note that they definitely suggest the fiduciary is responsible for more than simply holding the title. Remember, not all Fideicomiso Agreements are the same.

“Fiduciary obtains permit from the Department of Foreign Affairs which authorizes the Fiduciary to purchase the real estate.”

“The beneficiaries shall periodically notify the fiduciary as to the amount of construction or improvements carried out and their progress, so that the fiduciary in turn may modify the assets of the trust and carry out the accounting computations required.

“The fiduciary has the ability to administer, control, improve and repair, the property entrusted.”

“The Fiduciary, as the proprietor of the patrimony in Trust, upon administering it, will have all the rights and actions required to fulfill it … having all kinds of powers as owner, including, in a declaratory and non-restrictive way, all powers for litigation and collections related to administration and dominion that may require a specific clause as well as powers to acquire and mortgage in any ways, or to collect any payments and issue receipts, to endorse titles of credit, to grant legal powers and to waive protection lawsuits.”

“The fiduciary shall present a report on the trust with fiduciary substitution to the Department of Foreign Affairs annually and provide a description of any substitute beneficiaries.”

“When the duration period of the trust runs out the beneficiaries must request that the fiduciary extend the contract or the fiduciary will proceed to sell the property. The proceeds of the sale will be invested and maintained by the fiduciary for the trust beneficiaries. The fiduciary shall manage such account as long as the beneficiaries don’t claim it.”

“The beneficiaries are considered legally as the depositaries of the property and must inform the fiduciary of any problem or irregular situation related to the property so it can carry out any necessary actions or procedures.”

“In the case of an emergency, the fiduciary may discreetly carry out essential actions required to defend the validity of the trust.”

We know that it’s tempting to believe what you want to hear. However, think about it. You know that you used a Fideicomiso to get around the law prohibiting foreigners from purchasing property in the restricted zone. Also, remember what’s too good to be true is often too good to be true.

Moreover, a Private Letter Ruling is not valid unless the information is fully and accurately described. Therefore, it is important that all relevant information be provided to the IRS when requesting a PLR and a statement stating that the sole purpose of the Fideicomiso is to hold title, is actually correct.

There are additional benefits to having property held in a Fideicomiso. See the following excerpts found by doing a simple Google Search.

“The bank handles all of the paperwork including filing for all of the necessary permits with the Ministries of the Interior and Foreign Affairs. In general, the bank has the responsibility to the government to ensure precise fulfillment of the Trust agreement, assuming full technical, legal, and administrative supervision in protecting the interests of the beneficiary (purchaser).

Since by law Mexican banks enjoy government protection against bankruptcy, the Trust is indirectly guaranteed by the government. As a practical matter, even in unrestricted zones many foreigners prefer to hold their property in Trust.”

“The Fiduciario: A Mexican bank, in this case BBVA Bancomer, which holds the title of the property for up to 50 years, and acts on behalf of the non-Mexican beneficiary in all transactions related to the property held in trust.

Additional excerpts follow. Note that the excerpts contradict the statement in the PLR that the bank disclaims all responsibility for the condominium, including obtaining clear title, and has no duty to defend or maintain the condominium.

“The bank has the authority to determine what fees will be charged for any other types of activities they have to be involved in, such as reviewing documents, authorizing federal zone permits, authorizing mortgages, etc. Do not give this power to the bank. Set a fixed price for reviewing and signing documents other than powers of attorney or the sale of the property.”

“The trustee is responsible to the buyer/beneficiary to ensure precise fulfillment of the trust, according to Mexican law, assuming full technical, legal and administrative supervision in order to protect the interests of the buyer/beneficiary.

For practical purposes, even in unrestricted zones many foreigners and Mexican Nationals, for that matter, prefer to hold their property under a Fideicomiso.”

“If you are familiar with Bank Trusts or Family Trusts in the United States then you will find Bank Trusts in Mexico to be very similar.

“Bank trusts or “Fideicomiso’s” are not just for foreigners. Throughout Mexico many Nationals with money use this instrument as an Estate Planning tool for the ease of passing property to individuals who are not direct family and saving on Capital Gains taxes.

“Although the formation process for a land trust may seem relatively easy, and one where little effort is needed, it is advised that beneficiaries negotiate as much freedom and flexibility relative to the assets in trust, and that such terms be clear in the trust itself. Otherwise, the involvement of the trustee will be required, and it is well known that banks can be slow and bureaucratic. Generally speaking, beneficiaries will have the ability to use, and enjoy the property.

However when it comes to renting, managing or making improvements, securing permits, federal zone concessions, and the like, or other more specific actions, unless its negotiated and included in the trust, beneficiaries may find out that they require the participation of the trustee.

Trustees usually grant powers of attorney to beneficiaries to perform such actions, but the granting process takes time, and money, although bank fees are mostly reasonable. Some banks are more flexible than others when it comes to granting powers of attorney and their overall response time, so it’s important to choose wisely who the trustee will be when the trust is set up.”

“Both foreigners and nationals may establish a Fideicomiso (an Irrevocable Bank Trust). This trust is created with a Mexican bank. The bank accepts the fiduciary responsibilities of a Trustee. The Fideicomiso allows you to purchase anywhere in Mexico including the restricted zone.

The Notario requests that a bank of your choice act as a trustee on your behalf. The bank then will receive a permit to acquire the chosen property in trust. The trust is irrevocable and is established for a maximum of 50 years then it may be renewed for another 50 years. You are the beneficiary of the trust and have all the benefits of direct ownership. This includes the option to sell, remodel, lease, mortgage, or transfer the rights to a pre-appointed heir or another third party. The trust may also include language to bypass the probate court with joint ownership to transfer with the rights of survivorship. You do have the absolute right to transfer the title to another party at any time.”

“The bank has a fiduciary responsibility to represent your interest in the property”. Advantages of the Fideicomiso:

If the title papers, property dimensions and corresponding documentation are not perfect, the bank will not issue the Fideicomiso.”

As you can see your fees to set up and service your Fideicomiso might pay for a bit more than for the bank to simply hold and transfer title.

Anyone at the IRS could also conduct a minimal amount of research on the internet and suspect that holding title might not be the “sole purpose” of a Fideicomiso and that the Trustee has more responsibilities than simply holding and transferring title. Another PLR request or an audit situation could prove disastrous if you rely strictly on the recent PLR without reviewing your Fideicomiso Agreement.

In fact many tourist areas in Mexico have free Real Estate Guides. (IRS Agents do take vacations). On Thanksgiving, I looked at the “Vallarta Real Estate Guide” and read an article on Buying Real Estate in Mexico, it stated:

“The trustee is responsible to the buyer/beneficiary to ensure precise fulfillment of the trust, according to Mexican law, assuming full technical, legal and administrative supervision in order to protect the interests of the buyer/beneficiary.

Even if the result of the PLR was based on complete information, the PLR applies to a husband and spouse that own a corporation that created the Fideicomiso. Additionally, the PLR states that there is no arrangement to utilize the property in an activity for profit.

Therefore, the specifics of the PLR might not apply to those who rent the property or to multiple owners that are not married to each other.

To summarize: The PLR was decided regarding a specific agreement and may not have contained complete information. The missing information may have resulted in an misleading Private Letter Ruling.

As a result, people with a Fideicomiso could be lulled into a false complacency and later subject to huge penalties, because they did not take advantage of the current IRS Offshore Voluntary Disclosure Program.

What should I do – request a PLR, file Form 3520/3520-A or do nothing?

If you want a “get out of jail card” like the person who requested the PLR, you’ll need to follow the IRS General Information Letter and PLR and request your own PLR.

Unfortunately, the IRS recently raised the minimum fee for a PLR from $625 to $2,000 (the fee is more if your income is greater than $250,000). For a valid ruling, you’ll need to provide complete information.

(We have been successful with PLRs. However, we value our ability to practice before the IRS too much to knowingly submit a PLR that states that the trustee’s sole responsibility is to hold and transfer title.)

If you have not yet filed Form 3520 & 3520-A, the IRS Offshore Voluntary Disclosure Program (OVDP) is currently available. The program provides a guarantee of no penalties if you previously reported all foreign income on your tax returns. This program is unusual as there is no end date. However, the IRS can close the program at any time. Therefore, it is advisable to address this issue as soon as possible.

If you have been filing Forms 3520 & 3520-A, continue to timely file the forms.

Do nothing and be possibly subject to huge penalties: 35% of the fair market value in the year of purchase and additional contributions, and 5% of the fair market value of your property each year. Don’t forget the $10,000 penalty for not filing Form 8938.

A tax professional who helped write the PLR stated the following:

“Now, before you run out and tell your advisors that you don’t need to file Forms 3520 and 3520-A to report your Fideicomiso (or a similar structure), please remember that this guidance came in a PLR. As a result, only the client who requested it may rely on it. The benefit? It does indicate that the IRS does not see Fideicomisos as a direct threat, at least for now.”

Note that he ended with “at least for now”. Unfortunately, if you want a guarantee of no late filing penalties you need to deal with this before the IRS decides to terminate the current Offshore Voluntary Disclosure Program.

Additionally, the author of the PLR stated in a nonpublic article that the PLR can’t be cited as precedent, but it’s a good indication of how the IRS will view similar arrangements. In any case, the PLR doesn’t need to be cited at all if you can apply Treas. Regs. Section 301-7701-4(a) and Rev. Rul. 92-105 to your clients facts and come to the same result.

Unfortunately, the only way that you can apply the above mentioned Treas. Reg. & Rev. Rul. is to state that you are not aware of the entire responsibilities and duties required by the trustee of the Fideicomiso. Either that or find a tax professional that is willing to risk their ability to practice before the IRS under Circular 230 and draft an incomplete and possibly misleading PLR or advise you that you don’t need to file the foreign reporting forms.

Currently, outside of the three choices previously mentioned. The best thing that you can do to fight the Foreign Trust filing requirements for your Fideicomiso is to contact your congressperson. Maybe this is something that we can get congress to agree on!

Let us know if you need any help with your IRS Foreign Reporting Requirements

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John Dillinger, CPA, PFS, MS.tax

John Dillinger, CPA, MS.tax, PFS

John was recently a featured speaker on a panel of experts for the Knowledge Congress’ live webcast titled “Understanding Form 5471 & Owning Foreign Corporations.

In addition, John gave presentations on the US Tax Requirements when Buying Property Overseas at "International Living’s - International Real Estate and Investment Forum" in Toronto, Canada and their "Live & Invest Overseas Conference" in Las Vegas.

Currently John is helping those with IRS Foreign Reporting Requirements, come forward with the new IRS Offshore Voluntary Disclosure Program that ends on August 31, 2011. John previously helped those come forward before and after the previous IRS Offshore Voluntary Disclosure Program which ended 10/15/2009.